It is just astonishing what he doesn’t know, isn’t it?

That confusion, and the fact that almost no one believes that any company will last forever, mean that perpetual bonds are almost unknown now in the commercial world.

Well, we do have something very close, preference shares. Yes, they’re not the same but still, VCs use them all the time.

But this:

They have, however, been issued by governments. The most famous, at least in the case of the United Kingdom, is the 3.5% war bond issued in 1915, which was always problematic. Although this debt was issued as a perpetual, in practice it was redeemed in 2015 at the whim of the UK government.

Consols were first issued in 1751, they were the usual form of government bond too. The 3.5% war loan was in 1914, it was 4.5% on issuance in 1915. It was later changes which dropped the interest rate back down again.


And then this is gorgeous:

But third, and perhaps most importantly, the change in nature of the market for government securities makes perpetual bonds a very attractive proposition for government at present. If it is known, and many governments do have this understanding, that a government will be repurchasing some or all of the bonds that they issue through a quantitative easing programme, then to have perpetual bonds in issue makes their central banking operations significantly easier to manage.

We should issue perpetuals because it makes reversing QE easier. This from the man who has spent a decade telling us that no one will ever reverse QE therefore ………

Oh, and one more thing:

The first, and perhaps most obvious of these, is that current interest rates throughout most major economies are at record lows, and after adjusting for inflation usually represent negative return upon any bond that is currently issued. This, it has to be stressed, has not prevented such issues: the fact that governments alone can issue bonds that are guaranteed not to fail so long as the government in question has its own central-bank creates an appeal to the investors seeking security that very few other investments or deposit-taking mechanisms can supply. The demand for bonds is high when all else looks like it could fail. We are living in such times. That means a government that knows it is likely to borrow in perpetuity(and that is true of almost every government on earth now) can now lock into these low rates knowing that they will, because of the impact inflation, almost certainly also diminish over time.

What interest rate will the government have to pay on a perpetuity? Given that all those who might buy them also know about that inflation trick?

22 thoughts on “It is just astonishing what he doesn’t know, isn’t it?”

  1. I bet he would have bought Russian sovereign debt in 1917.

    But in any case a number of banks have issued perps in the last few years, with call options attached. Strange that he doesn’t seem to know the real risks attached to perps rather than the ones the crazy voices in his head have dreamed up

  2. “Well, we do have something very close, preference shares. Yes, they’re not the same but still, VCs use them all the time”

    Aren’t the VC ones usually convertible? So they’re not really intended to be perpetual. They were when I did VC structuring in the ’90s, but it may have changed. They were often convertible either way, into debentures or ordinary shares, at the holder’s choice (if the company flopped, you took debentures and tried to get something out of the bankruptcy; if it soared you took ordinary shares and profited when it was taken over).

  3. When we were running the War Loan to Unit Trust offer I seem to remember certificates coming in at 5% coupon. The acceptance of the reduction to 3¹/²% was promoted as a patriotic gesture* in the Depression, wasn’t it? And it most definitely wasn’t issued as a perpetual. It was ’52 & after. The government reserved the right of redemption if the interest rates moved against them. And it did just that.
    *And you know where patriotism gets you. Judging by some of the certificates submitted in amounts of £100 or less, these were the savings of people of modest means pledged to help the country. Hundred quid was a lot of money for most people in those days. By the time a lot of them had reached old age they’d seen the value of their patriotism more than halve in value & an income equivalent to a week’s wage barely cover the price of a meal in a cheap restaurant.

    Well, I was pretty well making the market in Russian sovereign debt & other issues around 1970. Bought all I could get my hands on. Framed or made up as lampshades, the certificates fetched good money.

  4. I just looked at a scripophily site. Some Confederate bonds are worth $500 dollars. Perhaps we should buy some and flog them to Spud at a profit? He would probably believe they are a source of income. After all, in Spud world, defaults never happen, not even when he worked at Dachau in 1939

  5. And here’s a thing. Just checked a file box came over from the UK. Hadn’t looked in it for years. Sheaf of St Petersburg 945 rouble 4¹/²% ( 100£Stg/2520FFranc/2040 Reichsmark)1913 Bearer. Coupons still attached. Mint condition. What am I bid?

  6. The Meissen Bison

    the fact that governments alone can issue bonds that are guaranteed not to fail so long as the government in question has its own central-bank

    Beautiful. So Capt. Potato believes that the notion that countries can’t go bust, an idea originally attributed to Walter Wriston of Citibank in the 80s before Mexico defaulted.

    And what has having your own central bank got to do with it? Greece would have and should have defaulted in 2012 and its central bank sits in Frankfurt/Main.

  7. Don’t Argentina and Chile have their own central banks? Oh they do. And yet they have defaulted on bonds. I suppose my time here is over

  8. Is there a similar tertiary market in Zimbabwean trillion dollar (?) notes, or do they lack the aesthetic flourish connoisseurs seek?

  9. I’m amazed. One of the commentators at Spud Central seems to have discovered the promissory note.

  10. Can certainly see those notes working as a lampshade, Diogenes. In Hampstead, Welwyn Garden City, or one of those sorts of places.

  11. Meanwhile Spud and Co go off grid
    “Oddly enough, I was chatting with a friend earlier today about what to invest in to preserve our comfortable lives. Apart from “canned food and ammunition” we couldn’t think of anything.”

  12. BIS do you have a more specific reference to the promissory note? Spud’s blog is so full of people waving their ineffectual hands to make it easy to spot the reference

  13. @Diogenes
    Under the post being discussed. One of the MMT enthusiasts pointing out that a certificate for zero coupon government debt is the same thing as a bank note. Although what never seems to penetrate there is the understanding of the basis currency, gilts & even company debt & shares & particularly bank deposits* stand on. In one word – confidence. That the entity issuing them will stand by what’s printed on the paper.

    *The small print in the T&C’s

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